OTTAWA (Reuters) - Canada's problem of high personal debt and a heated housing market appears to be improving but concerns remain and it will take "some time" for this risk to go away completely, the Bank of Canada said on Thursday.
In a semi-annual report, the central bank said overall risks to the Canadian financial system had diminished somewhat but still remained "high", the same risk classification it designated six months ago.
The biggest overall threat remains the euro-area crisis, although the bank said that was diminishing slightly. But the number one domestic risk comes from household finances and the housing market as consumers take advantage of five years of historically low borrowing costs to buy homes.
Since the last assessment in December, household debt accumulation has slowed, housing resale activity and starts have moderated and prices stopped rising in most major cities.
"Despite these positive developments, concerns remain. The level of indebtedness is still elevated, and the bank's stress test simulations suggest that households are vulnerable to adverse economic shocks," the bank said in its Financial System Review.
It pointed to stretched housing valuations in some areas and signs of overbuilding in the condo market. The imbalances "will take some time to correct" and should unwind gradually, it said, though there is a risk of a sharper correction.
The household debt-to-income ratio will likely remain near the current record high 165 percent this year, the bank predicted.
(Reporting by Louise Egan; Editing by Randall Palmer)